According to the general MP rule of the IS-MP-PC model, a 1% increase in the inflation rate lead the central bank to:
A)lower the real interest rate by 1%.
B)not change the nominal interest rate.
C)raise the real interest rate by more than 1%.
D)raise the nominal interest rate by more than 1%.

Question

Quizplus · Accepted Answer

The general MP (Monetary Policy) rule in the IS-MP-PC model suggests that to combat inflation, the central bank will raise the nominal interest rate by more than the increase in inflation. This is to ensure that the real interest rate increases, thereby cooling down the economy and controlling inflation.

According to the General MP Rule of the IS-MP-PC Model